Home Budget Tracker - helps you manage day to day spending. Use it to input receipts, track account balances, stick to your budget, and reconcile statements. Designed to be used by individuals and couples on the go at any stage of life.

Income Spending Simulator - projects the course of your financial life. It is useful when considering career changes, major lifestyle choices and retirement (how soon and how wealthy). For numbers oriented people it can be fun to play with as it is designed to be open-ended. The compare mode shows you what a specific change would have on cash flow, asset appreciation, and ending net worth.

Bitcoin is hovering around a new high of $10,500 per unit (see graph here). Lots of people are giddy. And you might be wondering what role Bitcoin, among other cryptocurrencies, should play in your asset allocation.

As you consider the role of crypto in your investment portfolio, ask yourself: Are you investing in cryptocurrencies? Or are you speculating in the prices of cryptocurrencies?

It's easy to confuse speculation with investing because both activities involve the same action: parking your money somewhere in the hopes that when you come back at a future time to pick up that money, it's grown - after subtracting the "parking" fees you pay.

But there's a difference.

And according to the legendary founder of Vanguard Jack Bogle in his bookEnough: True Measures of Money, Business, and Life:

"Investing is all about the long-term ownership of businesses. Business focuses on the gradual accumulation of intrinsic value, derived from the ability of our publicly owned corporations to produce the goods and services that our consumers and savers demand, to compete effectively, to thrive on entrepreneurship, and to capitalize on change. Business adds value to our society, and to the wealth of our investors."

And on the other hand, he writes:

"Speculation is precisely the opposite. It is all about the short-term trading, not long-term holding, of financial instruments - pieces of paper, not businesses - largely focused on the belief that their prices, as distinct from their intrinsic values, will rise."

And it's important to recognize the difference between the two because, according to Bogle in Enough, speculation is a loser's game:

"A simple example demonstrates that speculation is a loser's game. Assume that one-half of the shares of each of the 500 S&P stocks are held by investors who don't trade at all, and the other half are held by speculators who trade solely with one another. By definition, the investors as a group will capture the gross return of the index; the speculators as a group will capture, because of trading costs, only the (lower) net return. The obvious conclusion: investors win; speculators lose. There is no way around it. So the orgy of speculation we are witnessing today ill serves our market participants. It serves only Wall Street."

This same logic could apply to the cryptocurrency market, where middlemen (like Wall Street in the stock market) are making a racket.

Here's a breakdown of the differences between investing and speculation:

Investing

Speculation

Focus is on real, intrinsic value

Long-term mindset

Less emotional

Doesn't rely on market timing

Doesn't resemble gambling

Minimal trading

Serves you

Ripe for compounding returns

Light, if zero, emphasis on daily news

Focus is on prices, market psychology

Short-term mindset

Highly emotional

Relies on market timing

Resembles gambling

Lots of trading

Serves middlemen like Wall Street

Less ripe for compounding returns

Heavy emphasis on daily news

What makes Bogle's definitions of investing and speculation authoritative?

They're not.

But, in the context of markets, you can do much worse than borrow Bogle's understanding of investing and speculation because Bogle is perhaps the most important figure in the history of American investing.

"If a statue is ever erected to honor the person who has done the most for American investors, the hands-down choice should be Jack Bogle."

Which means the idea that investing is fundamentally about assets with intrinsic, real-world value and long-term thinking, and speculation is fundamentally about price fluctuation and short-term thinking is probably a useful framework for how to think about the two.

So are cryptocurrencies investments or speculations?

If you hold cryptocurrencies for decades, perhaps you can make an argument "you're investing in cryptocurrencies."

But cryptocurrencies, with the creation of Bitcoin, have only been around for 9 years.

This short timeline, plus the characteristics that cryptocurrencies...

1: Have little, if no, intrinsic value

2: Don't produce returns

3: And are supported by "the ability to think somebody else is going to take [them] off your hands for more than you paid for [them]," as Bogle says in an interview in reference to gold speculation

...mean cryptocurrencies more likely qualify under Bogle's definition as speculations, not investments.

If you expand Bogle's "investing is all about the long-term ownership of businesses" to long-term ownership of any asset with real-world, intrinsic value, let's see how cryptocurrencies stack up:

Out of the real-world assets above, cryptocurrencies are most like gold in that they're a store of value. And additionality, to a lesser but growing extent, they're a means of payment like cash.

But, beyond serving as a store of value and medium of exchange and its role in bespoke use cases, cryptocurrencies have arguably no real-world, intrinsic value. Their value is largely derived by their price. And their price is largely derived by speculation. Not by their ability to produce returns and generate new wealth.

Cryptocurrencies vs Crypto-companies

What does have real-world value is the blockchain technology that gives birth to cryptocurrencies.

And as such it's crucial to draw a line between cryptocurrencies and crypto-companies.

Cryptocurrencies are decentralized digital tokens. Among the most popular by market cap are Bitcoin, Ether, and Litecoin (you can see others on coinmarketcap.com). These tokens are a store of value and form of payment much like fiat currency. But unlike fiat currency, they're not created and backed by a central government authority.

(For a deeper dive into what Bitcoin and blockchain are, I point you here or here or here.)

And crypto-companies are businesses that invest in blockchain by building applications on top of or centered around the technology. Applications with real-world use cases for land ownership, health records, banking, corporate governance, and much more.

Crypto-companies may or may not sell their own cryptocurrency through an Initial Coin Offering (ICO) to raise funds. If they do, the resulting cryptocurrency doesn't necessarily give you equity stake in the crypto-company however. In fact, ICOs usually do not offer you equity.

It follows that buying the crypto-currency of a crypto-company from an ICO most likely means you only own the token - not the company that issued it. Which means, by Bogle's definition, ICOs are most likely not investments, but speculations.

Final Thoughts

1: Investing is about long-term ownership of assets with intrinsic value. Speculation is about short-term trading and price fluctuations.

2: Know there's a difference between investing and speculation because speculation looks like gambling, and at the casino the house usually wins.

3: No one ultimately knows what'll come of cryptocurrencies, crypto-companies, and the blockchain.

4: Remember, compounding returns (which benefit from longer time horizons) and low investment costs are two of your most powerful tools for investment success.

Notes:

Remember that all investments are subject to risk, including the possible loss of the money you invest.